Proponents of digital currencies, such as Bitcoin, Ethereum, Ripple, Bitcoin cash, and Litecoin, claim that these new forms of money will replace fiat money in the next five to 10 years.
Fiat money are currencies that governments declare to be legal tender, but are not backed by any physical commodity such as gold or silver. The value of fiat currency is derived from the relationship between supply and demand and not the material the money is made from.
Money is a form of a physical ledger that represents value held by the owner that can be transported and exchanged easily for something else of value. The idea that digital currencies will replace fiat currency in the near future is a rather bold prediction and is not without its doubters.
In the economic world, money is not consumed, but is valued to use later to trade for another good a person can use or consume. This is called monetary behavior. If you think of trading money as a behavior, you realize that value of money is derived from the behavior of other people. Since it can’t be consumed, money only has value if other people are willing to accept it in exchange for goods that can be used or consumed. Money appears to be the grease for the wheels of an economic system when people produce more of a good than they can personally use for the purpose of trading for goods that they want instead.
If we assume monetary behavior is what lead to the creation of money, the past evolution of money and its likely future is more easily understood. The first signs of a form of money in human culture dates back 75,000 plus years B.C. In early tribal cultures in Africa and the Middle East, crude ledgers, either in someone’s memory or sketched on a tablet, were kept within the tribe to keep track of items loaned, such as food, animals or clothing, from one member of the tribe to another with the anticipation that the item would be returned at some time in the future. This system of record keeping worked well within a tribe in a small area were everyone knew each other.
But when items were traded between neighboring tribes, this system broke down. By 40,000 B.C., you began to see collectibles and early forms of jewelry, such as beads made out of shells and pierced animal teeth, being used to keep track of what was owned between individuals and tribes. As human culture advanced from 5,000 B.C. to the great Mesopotamian, Egyptian, Persian and Roman civilizations of the Middle East and Europe, so did the form of money moving from shells and animal teeth to coins issued by the king or emperor.
As the early civilizations became more interconnected by trade, the currency used had to have universally recognized value in and of its own right. The currency had to be scarce, difficult to counterfeit, durable, portable and divisible, and be recognized as having value in different diverse cultures. As trade between Europe, the Middle East and China evolved, precious metals, such as gold and silver, and other commodities that were difficult to produce, became the currency of choice. This currency was called commodity currency because it was based on a commodity that was recognized as rare across different cultures and geographic areas of the world. Commodity currencies and money were widely used around the world until the invention of the printing press in the 1400’s and the advent of paper money in the form of promissory notes.
With the advent of the internet and the digital age, it’s possible we may be about to witness the evolution of the next chapter in the history of money, one based on a digital platform that can easily and securely be transported across the internet.
In much the same way paper currency replaced gold and silver coins, and credit cards replaced paper currency in everyday transactions, perhaps digital currencies like Bitcoin, Ethereum, Ripple, Bitcoin Cash and Litecoin could replace paper money and credit cards. Only time will tell, but the digital internet world may be ready for a new internet of money.
William Small, JD, CCIM is the Manager of Zenith Blockchain Technology Fund, LP, an investment fund focusing on emerging blockchain technology investments. Small may be reached at 970-925-3866, or at firstname.lastname@example.org.